One harmonious note

Chinese politicians often accuse foreigners of focusing too much on the problems in their country, and too little on the progress being made in improving the lot of the average resident. Yet there are numerous reasons to be deeply wary of taking the government's latest campaign to improve "social harmony" at face value. As China economist Nicholas Lardy has highlighted in a recent

, the recent abolition of the agricultural tax, one of the cornerstones of the programme to narrow the divide between rural and urban areas, gives a classic example of how the facts behind the figures rarely match the rhetoric:

Agricultural taxes collected fell from RMB33.7 billion in 2003 to RMB19.79 billion in 2004 and then to only RMB1.279 billion in 2005. The tax burden on farmers was reduced by RMB23.4 billion in 2004 and an additional RMB22 billion in 2005. However, RMB23.4 billion is the equivalent of only 1 percent of rural consumption expenditure or 0.1 percent of GDP in 2004. More importantly, the cut in the agricultural tax was off-set by record increases in other taxes levied on rural residents. In 2004 proceeds from the tax on occupied, cultivated land and the tax levied on contracts used to transfer land use rights or the sale, exchange, and inheritance of houses increased by one-half or RMB21 billion. The same taxes rose by an additional one-third or RMB22 billion in 2005. These increases entirely offset the reductions in the agricultural tax.

Part of the central government's problem is that, for all its good intentions, its options are still hemmed in by the need to entrust implementation of its welfare schemes to a local bureaucracy it (probably rightly) regards as corrupt and unreliable. This leads to a vicious cycle, in which the government launches pro-poor policies without the proper funding, leaving regional governments scrambling to find the money to cover their operations. Often the cash is found by exploiting fiscal grey areas, in ways that further reinforce the central government's perception of provincial and other local authorities as untrustworthy.

Before the cynics and pessimists begin to gloat, however, it does appear that one policy in the social harmony campaign is delivering benefits, and in one of the most crucial areas. The government's "two frees, one subsidy" programme (it sounds better in Chinese) provides funds that are meant to cover the cost of text books and education for poor students during their compulsory nine years education. Some also get allowances to help them board. The scheme has been running for many years, but has been ramped up as part of the government's pledge to increase spending on rural education by around US$27.6bn in the 2006-10 five year plan.

According to the China Development Brief , early reports from NGOs in Yunnan, Jiangsu, Xinjiang and Shaanxi indicate that the new subsidies appear to be actually getting through and are having a real impact in the communities for which they are intended. These are some of the poorest in the country, so a little extra money will go a long way towards raising living standards. By the end of next year the programme, which is currently mean to be in place in 13 western provinces, should be extended across the whole country.

It's still early days, and problems could well emerge as the roll-out goes forward, but the progress so far is encouraging. What is less certain is how this will impact on China's economic imbalances. It is often claimed that the need to save for children's education holds back consumption spending, contributing to the excessive reliance on investment and exports for growth, but whether the rural poor will start buying or instead simply save for other needs remains unclear. Perhaps if the government deals with their other main concern - the soaring cost of health treatment - they might feel a bit more confident about splashing out on nonessentials.

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